Sectors becoming more important than countries

There is growing evidence that sector investing is becoming increasingly important across global equity markets.

Monday, August 13th 2001, 11:47PM

There is growing evidence that sector investing is becoming increasingly important across global equity markets.

This trend has been best illustrated in recent years by the launch of funds investing in specific sectors such as technology, healthcare and resources.

The main reason for this change is the impact of globalisation, the Commonwealth Group says in a discussion paper on the topic.

It says that changes such as the fall of communism, the dominance of the market economy, reduction in trade barriers and the rise in cross border trade and capital flows are some of the key influences behind the rise of sector investing.

"It is now common for companies to generate the majority of their earnings from markets outside their national boundaries," it says.

Also a greater number of companies are listed on more than one stock exchange.

In the global share funds were invested along country lines, and it was considered local market conditions had the most influence on stock returns.

That's changing. Fidelity Investments vice chairman Bob Pozen estimates that global sector considerations have risen over the past half-decade from having about a 7% influence on a given stock’s price to a 17% influence.

Local market factors have fallen from 23% to 15% in their influence on stock prices.

He is convinced that industry sector, on a global basis, is playing a growing role in investment decisions compared to national market influences.

The shift away from country influences to sector based ones presents a raft of issues for advisers, investors and trustees.

Commonwealth Group says an investor can use specialist managers who have demonstrated ability to add value, or they could consider using "multi-nationals' mandates" which would strip out companies which had global revenue streams.

A third approach is to reconstruct benchmarks for investments so they reflect sectors rather than regions.

"It should be stressed however, that local country factors still influence equity returns, but that the extent of this influence appears to be diminishing," The Commonwealth Group says.